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Immigration and the Labor Market

By Eduardo Porter June 25, 2013 12:15 pmJune 25, 2013 12:15 pm

Are American workers are about to experience unwelcome new competition for their jobs? The bill moving through Congress to overhaul the nation’s immigration laws, if approved, would give employers access to expanded visa programs that would admit hundreds of thousands of immigrant workers, of both low and high skills, to toil in workplaces from strawberry fields to technology companies.

The legislation also offers legal status to millions of immigrants working illegally across the country, and ultimately a shot at citizenship. The change would encourage many to roam freely throughout the economy, leaving dead-end jobs in immigrant-heavy sectors of the labor market to seek higher pay elsewhere.

But by many accounts, most American workers need not worry about the prospect of hordes of workers entering the country with an eye on their jobs. Rather, immigration is seen as more likely to leave American workers better off.

The latest organization to come to this conclusion is the Congressional Budget Office, which issued a report this month concluding that the immigration bill would add six million workers to the American job market by 2023 and nine million by 2033 – increasing the labor force by 5 percent.

In the beginning, the jump in immigration would hit pay, the office said. It expects that by 2023 average wages would be 0.1 percent lower, on average, than they would have been absent a change in law.

Still, most American workers would have little to worry about. Average wages would decline to a large extent because most of the new immigrant workers would be paid less than domestic laborers, pulling the average down. Most importantly, the decline would only be temporary. Wages would rise as businesses invested to take advantage of the expanded labor force. By 2033, the C.B.O. forecast, average wages would be 0.5 percent higher than they would have been without the new immigrants.

These conclusions may seem to fly in the face of the laws of supply and demand. But they are not quite so odd. They can become obvious, in fact, when accounting for the response of American companies, and workers, to the inflows of foreign labor.

The belief that immigration would simply displace American workers relies on the assumption that employers would do nothing but replace a costlier domestic labor force with cheaper imports. But companies actually invest and expand to reap the higher profits that the new labor allows. This provides new opportunities for immigrants and domestic workers alike.

In other words, immigration can produce jobs for Americans, too. Restaurants are much less common in Norway than the United States because Norway lacks the cheap labor — making a dinner out in Oslo prohibitively expensive. In many New York restaurants, the American waiters and maitre d’ owe their jobs to the underpaid immigrants working illegally in the kitchen, whose low wages allow the restaurant to exist.

What’s more, immigration expands productivity. Highly skilled immigrant workers generate more productive innovations. And the influx of new workers of a variety of skills, high and low, would promote specialization.

Giovanni Peri, an economist at the University of California, Davis, and Chad Sparber of Colgate University found that American workers in states with large shares of less-educated immigrants gravitate towards communications-related occupations, their area of comparative advantage, while the immigrants stick to manual tasks and physical labor.

This increases the growth rate of the economy and pushes wages higher. Mr. Peri estimated that the wave of immigrants that entered the United States between 1990 and 2007 increased workers’ incomes by about $5,100 a year on average, in 2005 dollars. This amounts to more than a fifth of the income gains over the period.

There will be losers, especially among the workers most like the newcomers. A 50-year-old janitor with no high school diploma, for instance, will find it hard to make a transition into another job when immigrants move into the building maintenance business. But this group is probably small, and composed mostly of illegal immigrants already in the workplace.

George Borjas of Harvard University argues that those without a high school diploma – about 8 percent of the labor force — are easily replaced by immigrants and are likely to suffer a noticeable drop in wages if low-skill immigration increases. Mr. Peri disagrees. He argues that high-school dropouts could find jobs in parts of the labor market that might even benefit from new immigrants’ arrival.

The Congressional Budget Office looked at it differently. Rather than split the work force by educational attainment, it sliced it into five equal cohorts of skill, from the least educated fifth to the most. It found that none of these groups is hurt by immigration over the long run, in absolute terms. Some gain more, and some gain less.

Unskilled American workers – who never completed high school, or maybe got an equivalency diploma — would do relatively poorly. So would highly educated workers, who would face more competition from new immigrant scientists and engineers with H1-B visas.

Average wages in both these slices would decline 0.3 percent relative to the average by 2033. The rest of workers, by contrast, would see their relative wages rise by 0.5 percent.

But even though the gains would not be distributed evenly, according to the study, every group would win. “Average wages would be higher under the bill than under current law for workers in all quintiles of the skill distribution,” it said.

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